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Question - Mr Aidil is the Managing Director of Teguh Idaman Bhd. This company has been facing losses in the past few years and it has RM960 million in tax loss carry forward. This implies that the next RM960 million of the firm's income will be free from corporate taxes. The management of Teguh Idaman Bhd expects that the company will take many years to generate the RM960 million in earnings. At present, there is a moderate amount of debt in the capital structure of Teguh Idaman Bhd. In view of losses incurred and gearing level, Mr Aidil has expressed his concerns regarding the proposed financing of the upcoming project whether to issue debt or equity. He strongly urged that the upcoming project would turn Teguh Idaman into a profitable company in the coming years when the project return materializes.
Required -
a. Discuss the financial implications of tax losses and firm's existing gearing level to the proposed financing.
b. Recommend to Mr Aidil the best method of financing to support the upcoming project.
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